The dismal performance of the manufacturing sector in India in the last two decades has been an area of concern for policymakers. This paper attempts to understand the reasons underlying such dismal performance by focusing on the role of the financing factors in manufacturing. The study argues that liberalisation measures were inimical to competition. This, along with the diminishing role of development finance institutions, risk-averse behaviour of the banks, lacklustre performance of the new issues market, concentration of stock market activity and the minuscule size of the corporate debt market have increased the effective cost of debt. Remedial measures in terms of devising suitable derivate instruments, increasing reliance on the corporate debt market, expanding the reach of the mutual funds industry and better corporate governance and accounting standards are proposed so as to instil buoyancy in the sector.
